Ground rules for retirement investing

Despite all our education, young professionals like myself have never been taught a basic set of ground rules for investing. Can you provide some tips that can help us stay out of trouble as we start investing for retirement? -- Greg H.

Even though more high schools and colleges are adding personal finance and investing courses to their curricula these days, many people finish their formal education with little practical knowledge or experience about how to manage their money.

Not to worry. There are so many online resources available -- including our extensive MONEY 101 series that covers everything from investing in stocks and bonds to planning for retirement -- that anyone interested in getting a better handle on their finances should have no trouble doing so.

However in addition to understanding how markets and investments work, you've also got to consider how your attitudes and actions can affect your odds of success.

With that in mind, here are five tips that can help you get off to a good start and improve your chances of financial security.

1. Focus on saving first, then investing. I know you asked about investing ground rules. But before you even think about investing, you need to know that the savviest investing in the world doesn't mean diddly-squat if you're not saving diligently. Your returns just won't have a significant effect if you don't have a decent amount of savings to invest.

2. Don't obsess about beating the market averages. Nobody likes to aspire to "average" results. But guess what? If you earn the market average -- or even close to it -- you can accumulate quite a lot of dough. For example, if you had invested $10,000 in the Vanguard 500 Index fund(VFINX), a fund that tracks the Standard & Poor's 500 index of mostly large-company stocks, 20 years ago you would have more than $50,000 today. That's an annualized return of 8.4%.

Did some funds do even better? Sure, but not most, and it would be virtually impossible to identify the higher gainers in advance.

Besides, many of the winners outperformed only because they took on extra risk. If you stick to broadly diversified stock and bond funds, especially index funds or ETFs that track the broad market averages, you'll do much better in the long run than investors who are constantly on the lookout for the hot investments du jour.

Low-risk investing: Is it worth it?

3. Keep your emotions in check. When the markets are on a roll, overconfidence reigns, and we underestimate risk. That's one reason investors blithely plowed huge sums into dot-com and tech stocks with little or no profits in the go-go 1990s.

By contrast, after a market meltdown investors become fearful and flee stocks for the security of bonds and cash, even though stocks are usually more attractively priced after big downturns.

You're much better off avoiding this emotional seesaw and investing with equanimity. The best way to invest for the long-term is to create a mix of stocks and bonds that makes sense given your age, goals and risk tolerance, and then largely stick to it except to periodically rebalance.

Any money you'll need within the next few years -- say, for emergencies, a down payment on a house or looming college tuition bills -- should stay in FDIC-insured savings accounts. Yes, they're paying a pittance these days. But safety is your primary goal for this money, not a big return.

4. Hold the line on costs. People tend to gravitate toward investments that have recently posted the best returns. But returns are highly volatile. And the fund leading the pack one year may be a laggard the next.

Expenses, by contrast, are much more predictable. A fund that's much more expensive than its peers is likely to remain that way. And since each dollar of expenses comes out of raw returns, higher expenses act as a drag on a fund's performance.

That's not to say that it's impossible for a high-fee fund or other investment to outrun low-cost peers, it's just less likely.

You'll boost your odds of investing success by sticking to funds that have a record of solid performance and low fees. You can find such stalwarts on our MONEY 70 list of recommended funds.

5. Get help if you need it. I believe most people are capable of investing on their own, if they're willing to learn a few fundamentals and exercise common sense. But if for whatever reason you feel you're not up to flying solo -- or you want some guidance before venturing out on your own -- then it makes sense to get assistance.

After all, you don't want to be the investing equivalent of one of those guys who will drive around lost for hours rather than ask for directions. When it comes to your finances, the stakes are too high.

Fortunately, there are plenty of options available for people who want help, ranging from an ongoing relationship with an adviser to hiring one on a project or hourly basis. Be sure to vet the adviser and ask plenty of questions. Otherwise, you may end up getting a glorified sales pitch rather than true advice or, worse yet, you could find yourself the target of a scamster.

One final note as you embark on your investing odyssey. You're going to make some mistakes. We all do. But if you follow these guidelines, your missteps shouldn't inflict mortal damage, and over the long term you should do fine.